## ppea2024066

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### EXECUTIVE SUMMARY — Global backdrop and near-term outlook
- Headline global inflation peaked at 9.4 percent year over year in the third quarter of 2022 and is projected to reach 3.5 percent by the end of 2025, below the 2000–19 average of 3.6 percent.
- Global growth is projected to hold steady at 3.2 percent in 2024 and 2025.
- The global growth forecast five years from now is 3.1 percent.
- Near-term global risks are tilted to the downside, including:
  - sudden eruptions in financial market volatility tightening financial conditions;
  - disruptions to the disinflation process from commodity price spikes;
  - deeper or longer-than-expected contraction in China’s property sector;
  - intensification of protectionist policies and rising social tensions.
- Financial stability risks: accommodative financial conditions have facilitated buildup of vulnerabilities (lofty asset valuations, higher global debt, increased leverage among nonbank financial intermediaries, fragilities in corporate and commercial real estate).

### GCC recent performance and resilience
- Overall real GDP growth in the GCC decelerated in 2023 to somewhat below 1 percent, driven mainly by the hydrocarbon sector.
- Country-specific 2023 real GDP outcomes:
  - Kuwait: -3.6 percent.
  - Saudi Arabia: -0.8 percent.
  - United Arab Emirates: 3.6 percent.
  - Bahrain: 3 percent.
  - Oman: 1¼ percent.
  - Qatar: 1¼ percent.
- Determinants of resilience:
  - Strong non-hydrocarbon activity, reform implementation, and project spending.
  - Limited spillovers from regional conflicts to date.
  - Exports from major GCC ports rebounded though remain at the lower end of historical levels.
  - Net portfolio inflows rebounded from their trough in Q4 last year.
  - International flight arrivals held up and reached record levels in some cases (e.g., Qatar, Saudi Arabia).

### Financial market resilience (Box 1 key findings)
- Event-study evidence (daily data, January 1, 2004–April 23, 2024) indicates resilience of GCC financial markets during global risk-off and oil price jump events.
- Bonds: impact of global risk-off events on GCC relative bond yields is statistically insignificant at the 95 percent confidence level, even when oil price jumps coincide.
- Equities:
  - GCC stock returns exceed US stock returns by 0.8 percentage points on average across countries during global risk-off events.
  - When oil prices also jump, the outperformance increases by 0.3 percentage point on average.
- Possible drivers: macroeconomic and geopolitical stability, large financial buffers, lower trading volumes, high domestic investor involvement (including SWFs).
- Policy implication: continue implementing prudent policies within sound institutional frameworks as market opening, IPO activity, and international bond issuance increase exposure to global sentiment.

### Inflation, output gap, and labor market
- Headline inflation nearly halved to somewhat below 2 percent in 2023 and is expected to remain at similar levels in the medium term.
- Tradable goods inflation fell due to maintained subsidies/caps, currency pegs to the US dollar, and GCC central banks broadly following U.S. tightening.
- Nontradables inflation varied across countries:
  - Qatar: nontradables inflation moderated from World Cup-related highs.
  - Saudi Arabia: nontradables inflation remained elevated, driven mostly by rental prices amid a positive non-hydrocarbon output gap.
- Aggregate non-hydrocarbon output gap in the GCC remained broadly neutral.
- Unemployment rates fell to pre-COVID-19 levels.

### Fiscal accounts and fiscal stance (2023)
- Overall fiscal balance fell by 4 percentage points to somewhat below 6 percent of GDP in 2023.
- Change in non-hydrocarbon fiscal stance (non-hydrocarbon primary balance to non-hydrocarbon GDP):
  - Oman: consolidation worth 3 percentage points of non-hydrocarbon GDP.
  - UAE and Saudi Arabia: loosened by ¾–1 percentage point.
  - Qatar: loosened by 1½ percentage points.
  - Bahrain: momentum for consolidation slipped after earlier reductions (9 percentage points to 18 percent of non-hydrocarbon GDP in 2022).
  - Kuwait: fiscal stance loosened by around 6 percentage points due to public sector wage bill and subsidies.
- Central government debt as a share of GDP was broadly unchanged in 2023.

### Monetary policy and financial sector
- GCC monetary policy mirrored the U.S. Federal Reserve to support the peg; appropriate stance maintained.
- Cumulative rate hikes between early-2022 and mid-2023: 275 basis points in the GCC versus 525 basis points in the U.S. Federal funds rate.
- GCC central banks started cutting the policy rate in September 2024, mirroring the U.S. Federal Reserve; exception: Kuwait’s tightening cycle halted in July 2023 due to its peg to an undisclosed basket.
- As of mid-2024 monetary policy stance assessed to be tight in GCC countries.
- Liquidity management and monetary frameworks strengthened (examples: UAE Dirham Monetary Framework; Saudi auction mechanism for public deposits; Oman interest rate corridor; Qatar T-bill use).

### Banking sector performance and risks
- Asset quality strong amid decelerating private sector credit.
- Capital adequacy ratios remain well above regulatory requirements.
- Return on equity in the range of 5-15 percent, rebounding on higher net interest margins.
- Credit growth decelerated in most countries; country specifics:
  - Saudi Arabia: double-digit credit growth due to corporate loans and mortgage lending.
  - UAE: credit demand remained strong despite tightened underwriting.
- NPLs:
  - UAE gross NPL ratio peaked near 8 percent and decreased to close to 5 percent in 2023.
- Provisioning is prudent, exceeding NPL stock in Kuwait and Saudi Arabia.
- Funding dominated by deposits; loan-to-deposit ratio below or around 100 percent in four countries.

### Financial markets, IPOs, and bond flows (2023–2024)
- IPOs: more than 30 IPOs in the first three quarters of 2024 totaling over US$5 billion.
- Saudi Aramco secondary offering: US$12 billion.
- Largest IPO in the GCC in this period: OQ Exploration and Production raised US$2 billion on the Muscat Stock Exchange.
- Stock market performance:
  - 2023 vs MSCI EM (+7 percent): Kuwait -10.1 percent; Oman -1.3 percent; Qatar -0.4 percent; UAE -3.0 percent; Saudi Arabia +8.7 percent; Bahrain +3.4 percent.
  - 2024 (as of mid-October) vs EM performance +13 percent: Bahrain +13 percent; Kuwait +3 percent; Oman +1 percent; UAE +1 percent; Qatar -3 percent; Saudi Arabia -3 percent.
- Net bond outflows from the GCC: US$2.5 billion in 2023 and US$1.4 billion during January–August 2024.
- 2024 international bond issuances highlighted (values preserved as presented): US$17 billion by the sovereign in Saudi Arabia; US$9.6 billion by Saudi Arabia’s Public Investment Fund; US$9 billion by Saudi Aramco; US$2 billion by Bahrain; US$5 billion by Abu Dhabi; US$2.5 billion by the Abu Dhabi Development Holding Company; US$2.5 billion of first-ever green bonds by Qatar.

### External sector, reserves, and capital flows
- GCC current account surplus: 17.8 percent of GDP in 2022; 11.8 percent of GDP in 2023; expected 9.7 percent of GDP in 2024.
- External balances supported by relatively high hydrocarbon prices and robust non-hydrocarbon exports including tourism (Qatar: peak Asian Cup arrivals exceeded World Cup; Saudi Arabia: 100 million inbound and domestic visitors achieved in 2023).
- Inward FDI accelerated in some countries (Bahrain, Oman, Saudi Arabia, UAE).
- GCC disbursed about US$56 billion from 2020 to 2024Q3 in financing for neighboring countries, with about US$24 billion of new funds committed.
- Examples of announced investments: UAE US$35 billion in Egypt; Saudi Arabia US$5 billion in Pakistan.
- Official reserves generally adequate; countries hold large financial assets through SWFs.
- External position assessments: broadly in line with fundamentals in Oman and the UAE; stronger in Qatar; weaker than fundamentals in Kuwait and Saudi Arabia but still strong given large buffers.

### Growth projections and hydrocarbon outlook (medium term)
- GCC overall output growth:
  - Projected rebound to 1½ percent in 2024.
  - Projected to strengthen to 3½ percent in 2025.
- Medium-term non-hydrocarbon output growth projected at 3½ percent overall.
  - Cross-country medium-term ranges:
    - Kuwait and Qatar: 2–3 percent.
    - Bahrain, Oman, Saudi Arabia, UAE: 3.5–4.5 percent.
- Natural gas and hydrocarbon expansions:
  - Oman: new train capacity 3.8 mtpa; LNG capacity to 15.2 mtpa by 2029.
  - Qatar: currently produces 77 mtpa of LNG; planned increase from 48 mtpa to 65 mtpa, lifting total to 142 mtpa by 2030.
  - Saudi Arabia: expand natural gas production by 60 percent.
  - UAE: expand LNG export capacity from 6 mtpa to 15 mtpa.
  - Overall natural gas production may increase by around 50 percent if production of other gas products expands.
- IEA STEPs consistency and caveats: IEA (2022) STEPs projects Qatar and Saudi Arabia to expand gas production by around 90 percent each by 2050; Middle East production expansion more than 250 mtpa (or more than 50 percent) by 2050. Energy-transition scenarios (e.g., IEA APS) could create oversupply risks for some countries.

### Inflation outlook by country (2024–25 and medium term)
- Near term (2024–25) headline inflation expectations:
  - Above 2 percent in Kuwait.
  - Below 2 percent in Bahrain, Oman, and Qatar.
  - Broadly 2 percent in Saudi Arabia and the UAE.
- Medium term: headline inflation expected to stabilize at around 2 percent.

### Risks, spillovers, and remittances
- Near-term upside risks: faster reversal of OPEC+ cuts, higher natural gas production, higher commodity prices, accelerated project implementation, faster monetary easing in advanced economies.
- Near-term downside risks: global slowdown (especially China), higher-for-longer interest rates, overheating from large projects, protracted/broadened conflicts causing volatile hydrocarbon prices and reduced tourism/investment.
- GCC spillovers: US$110 billion remitted out of the GCC in 2023; GCC provided about US$56 billion disbursed from 2020 to 2024Q3 in financing for neighboring countries.

### Fiscal consolidation needs (baseline and additional)
- Baseline projected increase in the non-hydrocarbon primary balance relative to non-hydrocarbon GDP between 2023 and 2029:
  - Qatar and the UAE: around 3½–4 percentage points.
  - Bahrain, Oman, and Saudi Arabia: around 7–8½ percentage points.
  - Kuwait: around 12 percentage points.
- Staff assessment: GCC countries, except Qatar, need to consolidate beyond baseline projections.
- Table 1 country details (values preserved as presented):
  - Bahrain: Baseline 6.8; Additional consolidation needed? Y; Size and pace: Substantial, sustained
  - Kuwait: Baseline 12.2; Additional consolidation needed? Y; Size and pace: Substantial, gradual
  - Oman: Baseline 7.9; Additional consolidation needed? Y; Size and pace: 1.5
  - Qatar: Baseline 4.4; Additional consolidation needed? N; Size and pace: ...
  - Saudi Arabia: Baseline 8.6; Additional consolidation needed? Y; Size and pace: 5, medium term
  - United Arab Emirates: Baseline 3.6; Additional consolidation needed? Y; Size and pace: 3, gradual
- Most consolidation is expenditure-driven (public investment reduction, spending efficiency, wage bill containment, subsidy rationalization); some revenue measures planned.

### Fiscal policy recommendations (short, medium, long term)
- Short term: remain prudent, rebuild policy buffers during good times, apply gradual consolidation given neutral/slightly negative non-hydrocarbon output gaps.
- Medium/long term:
  - Prioritize non-hydrocarbon revenue mobilization.
  - Introduce or broaden VAT where appropriate (recommendation: introduce broad-based VAT in Kuwait and Qatar; broaden VAT base elsewhere).
  - Consider CIT for domestic firms in Kuwait and Qatar; UAE adopted a general federal CIT of 9 percent in June 2023.
  - Adopt fiscal rules anchored in a PIH-based medium-term fiscal framework (MTFF).
  - Strengthen fiscal institutions, fiscal risk assessment, consolidated sovereign SALM frameworks, and fiscal transparency.
  - Replace profit-based tax incentives with cost-based incentives (accelerated depreciation, investment tax credits).

### Public spending efficiency and subsidy reform
- Median wage around 8 percent of GDP in 2022; subsidies around 6 percent of GDP in 2023.
- Recommendations:
  - Rationalize public wage bill and align public wages with private sector over time in selected countries.
  - Strengthen public investment management (use IMF PIMA).
  - Phase out energy and water subsidies progressively with targeted support to vulnerable groups (country guidance: Qatar, Saudi Arabia, Oman, UAE models noted).

### Fiscal rules, institutions, and SALM
- Long-term anchor: PIH-based non-hydrocarbon primary balance consistent with sustainable flow of income from net wealth.
- Establish operational fiscal rules with escape clauses, legislation, and independent monitoring (fiscal councils).
- Publish MTFFs, general government budgets, sectoral fiscal statistics, hydrocarbon revenue strategy, and public sector balance sheet; bring extrabudgetary spending above the line.
- Prepare fiscal risk statements and develop sovereign SALM frameworks; note rising SWF domestic exposure (~40 percent of AUM in 2024).

### Monetary, exchange rate, and liquidity management
- Pegs remain appropriate nominal anchors and have delivered low, stable inflation.
- Enhance liquidity management frameworks (standing facilities, market-based approaches, liquidity forecasting, transparency).
- Continue following U.S. monetary policy cycle consistent with pegs; improve domestic monetary transmission.

### Financial sector policies and stability
- Policy priorities:
  - Monitor capital, liquidity, and asset quality; conduct regular stress tests including new risks (US policy easing, real estate concentration).
  - Consider recalibrating macroprudential policies and activating positive neutral countercyclical capital buffers where appropriate (zero at present in Oman, Saudi Arabia, UAE).
  - Formalize ELA frameworks, establish deposit insurance, comprehensive bank resolution frameworks.
  - Enhance AML/CFT regimes and implement Basel III final reforms and IFRS9 where needed.
  - Reduce data gaps (e.g., develop real estate price indices).

### Deeper domestic financial markets and integration (Section 32 and Annex III)
- Continued issuance of local currency sovereign debt to develop yield curves.
- Deepen corporate bond markets including green bonds and sukuk; address needs for longer maturities, collateral, and refinancing.
- Financial integration measures to boost FDI and portfolio flows:
  - Loosen foreign ownership limits, consider pan-GCC stock exchange, cross-listings, harmonize listing/disclosure rules, modernize trading/clearing systems.
- Net capital flows and NIIP:
  - Inward FDI exceeded 2 percent of GDP on average between 2020–23; Bahrain, Oman, UAE saw around 5 percent of GDP between 2020–23.
  - GCC NIIP hovered around 200–250 percent of GDP in the early-2020s with cross-country range from above 500 percent in Kuwait to slightly negative in Oman.
  - GCC outward portfolio investments into U.S. long-term securities increased by 50 percent since 2020.

### Structural policies: diversification, industrial policy, and labor reforms
- Productivity drivers (Box 4 contributions by source variables; preserved ordering and values as presented):
  - Estimated impacts (coefficients; significance indicated): ***1.8; ***1.4; *0.94; *0.90; *0.85; 0.80; 0.6; **-2.2.
  - Importance by region (percentage contributions): Digitalization 10.9; Macro Stability 10.3; Trade Complexity 5.9; Institutional Quality 5.0; Capital Account Openness 6.4; Labor & Inclusion 5.6; Financial Integration 3.1; State Footprint 12.5.
- Export diversification findings:
  - A 10 percent rise in real per-capita exports of high-complexity products is associated with a 0.4 percentage point increase in real per-capita GDP growth.
  - Export concentration remains higher in Kuwait, Oman, Qatar, and Saudi Arabia (around 0.5); Bahrain and the UAE are more comparable to non-GCC resource-rich peers.
- Industrial policy guidance:
  - Target market and capability failures, include rigorous calibration, monitoring, sunset clauses, avoid discriminatory local content measures, focus on export diversification.
  - Documented more than 50 IP measures in the GCC over the past two years, predominantly subsidies and trade policy measures focused on manufacturing.
- Labor market reforms and human capital:
  - Priorities: contain public sector employment, facilitate nationals’ private sector employment, align education with labor market, improve labor market flexibility, enhance women’s participation.
  - Training and skills upgrading programs and large-scale Human Capability Development program (target 1.7 million participants).
  - Labor mobility reforms: greater job portability for expatriates, investor visas, golden visas; pension/end-of-service reforms under consideration.

### Digitalization, AI, fintech, and climate
- Digitalization: Qatar, Saudi Arabia, and the UAE on par with AEs on Enhanced Digital Access Index; GovTech Maturity Index: Saudi Arabia and the UAE ranked third and fourth globally in 2022.
- AI projected impacts:
  - AI could boost GDP by around 35 percent by 2030 in the UAE.
  - AI could constitute more than 12 percent of GDP by 2030 in Saudi Arabia.
- Fintech and CBDCs:
  - Regulatory sandboxes and digital bank licensing ongoing; Bahrain, Oman, Saudi Arabia, and the UAE exploring CBDCs.
  - Cautious approach recommended due to potential deposit disintermediation risks.
- Climate and energy transition:
  - Renewable projects and hydrogen initiatives expanding; green bond issuances increased.
  - Policy recommendations: rationalize energy subsidies, support green finance, and enforce green disclosure standards.

### Annex I — Global Minimum Corporate Tax (Pillar Two) implications
- Pillar Two establishes a global minimum effective tax of 15 percent on profits of multinationals with group turnover of at least EUR 750 million.
- Estimated global CIT revenue increase from the minimum tax: 5.7 percent.
- SBIE exemption: 5 percent of each of payroll and tangible assets.
- Estimated share of global profit subject to top-up tax: about 19 percent.
- Current CIT landscape:
  - UAE new general CIT statutory rate: 9 percent (for financial years starting on or after June 2023).
  - Saudi Arabia statutory CIT rate: 20 percent.
  - Zakat: generally 2.5 percent on the stock of net wealth (recognized under GloBE rules).
- Policy recommendations:
  - Consider adopting a QDMTT to retain top-up revenues domestically.
  - Design CIT to be neutral for investment decisions and financing modality; replace profit-based incentives with cost-based incentives.
  - Pursue regional CIT coordination to reduce tax competition and facilitate administrative cooperation.
- Bahrain announced in September 2024 a 15 percent Domestic Minimum Top-up Tax effective January 2025.

### Concluding outlook and IMF collaboration
- Near term: activity supported by gradual unwinding of oil production cuts.
- Medium term: non-hydrocarbon strengthening backed by reforms and robust hydrocarbon sector; inflation stabilizing at low levels; external sector remaining strong with gradual narrowing of current account surpluses.
- Short-term policy priorities: prudent fiscal policy, monetary policy consistent with pegs while improving transmission, vigilant financial sector policies.
- Medium-term priorities: fiscal consolidation oriented to non-hydrocarbon revenue, adoption of fiscal rules and MTFFs, sovereign SALM and risk monitoring, full implementation of reform agendas, deeper trade and financial integration.
- IMF engagement: country teams and regional offices stand ready to support surveillance, analysis, and capacity development.

*Source: ppea2024066 — IMF staff summaries and chapter content (cut-off dates and figures as presented in the supplied text).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Global backdrop and near-term outlook
- Headline global inflation peaked at 9.4 percent year over year in the third quarter of 2022 and is projected to reach 3.5 percent by the end of 2025, below the 2000–19 average of 3.6 percent.
- Global growth is projected to hold steady at 3.2 percent in 2024 and 2025.
- The global growth forecast five years from now is 3.1 percent.
- Near-term global risks are tilted to the downside, including:
  - sudden eruptions in financial market volatility tightening financial conditions;
  - disruptions to the disinflation process from commodity price spikes;
  - deeper or longer-than-expected contraction in China’s property sector;
  - intensification of protectionist policies and rising social tensions.
- Financial stability risks: accommodative financial conditions have kept near-term risks contained but facilitated buildup of vulnerabilities (lofty asset valuations, higher global debt, increased leverage among nonbank financial intermediaries, fragilities in corporate and commercial real estate).

### GCC recent performance and resilience
- Overall real GDP growth in the GCC decelerated in 2023 to somewhat below 1 percent, driven mainly by the hydrocarbon sector.
- Country-specific 2023 outcomes:
  - Kuwait: -3.6 percent (real economic activity contracted).
  - Saudi Arabia: -0.8 percent.
  - United Arab Emirates: 3.6 percent (robust non-hydrocarbon growth).
  - Bahrain: 3 percent (non-hydrocarbon sector led growth; note: in August 2024 Bahrain published revised GDP series with expanded coverage and transition to ISIC rev. 4).
  - Oman: 1¼ percent.
  - Qatar: 1¼ percent.
- Determinants of resilience:
  - Strong non-hydrocarbon activity supported overall growth amid reform implementation and project spending.
  - Spillovers from regional conflicts have been limited; trade, investment, and tourism flows largely unaffected to date.
  - Exports from major GCC ports have rebounded though remain at the lower end of historical levels.
  - Net portfolio inflows rebounded from their trough in Q4 last year.
  - International flight arrivals have held up and reached record levels in some cases (e.g., Qatar, Saudi Arabia).

### Financial market resilience (Box 1 key findings)
- Event-study evidence (daily data, January 1, 2004–April 23, 2024) indicates resilience of GCC financial markets during global risk-off and oil price jump events.
- Bonds: the impact of global risk-off events on GCC relative bond yields is statistically insignificant at the 95 percent confidence level, even when oil price jumps coincide.
- Equities: GCC equities outperform US equities during risk-off periods:
  - GCC stock returns exceed US stock returns by 0.8 percentage points on average across countries during global risk-off events.
  - When oil prices also jump, the outperformance increases by 0.3 percentage point on average.
- Possible drivers: track record of macroeconomic and geopolitical stability, large financial buffers, lower trading volumes, high domestic investor involvement (including SWFs).
- Policy implication: continue implementing prudent policies within sound institutional frameworks to safeguard financial markets, especially as market opening, IPO activity, and international bond market issuance increase exposure to global sentiment.

### Inflation and external balances
- Inflation in the GCC is stabilizing at a low level.
- External buffers remain comfortable despite narrower current account balances.

### Policy priorities and recommendations
- Fiscal policy:
  - In the short term: remain prudent and rebuild policy buffers, especially during good times.
  - In the medium run: balance fiscal consolidation to achieve and maintain intergenerational equity and sustainability with investments to support economic diversification.
  - Strengthen fiscal institutions: credible medium-term fiscal frameworks, appropriate fiscal rules, fiscal risk assessment, consolidated sovereign asset-liability management frameworks, credible monitoring, and greater fiscal transparency.
- Monetary policy:
  - Maintain current monetary policy frameworks consistent with the currency pegs.
  - Reforms to enhance liquidity management frameworks and deepen financial markets to strengthen monetary policy transmission.
- Financial sector policies:
  - Banking system is sound.
  - Focus on adapting to and mitigating “old” risks (e.g., rapid credit growth, sovereign-bank nexus) and “new” risks (e.g., digitalization, climate change).
  - Monitor and respond to emerging risks.
- Structural policies:
  - Progress has been made on reforms supporting economic diversification (business climate, human capital, digitalization); implementation should be intensified to achieve the Visions.
  - Greater trade and financial integration should remain a common policy priority to fully reap reform dividends, enhance resilience to geoeconomic fragmentation, and benefit from potential trade diversion.
  - Risks from some policies, including industrial policies and domestic investment by sovereign wealth funds (SWFs), should be carefully managed.

### Outlook, risks, and medium-term concerns
- The envisaged easing of oil production cuts and natural gas expansion is expected to spur recovery in the hydrocarbon sector, while the non-oil economy continues to expand.
- Risks around the outlook are broadly balanced in the near term.
- More challenging medium-term risks, particularly in the context of geoeconomic fragmentation, call for action on policy priorities to preserve resilience and support the transition to sustainable, diversified growth.

*Source: EXECUTIVE SUMMARY (ppea2024066). Cut-off date for data: October 18, 2024.*

### 6. Inflation has been contained, helped by the appropriate tightening of monetary

### 6. Inflation has been contained, helped by the appropriate tightening of monetary conditions and a broadly neutral output gap

### Inflation developments
- Headline inflation rates nearly halved to somewhat below 2 percent in 2023 and is expected to remain at similar levels in the medium term.
- Tradable goods (including food) inflation fell as subsidies and caps on certain prices were maintained, currency pegs to the strong US dollar contained imported inflation, and GCC central banks broadly followed U.S. monetary policy tightening.
- Nontradables inflation has showed more variation across countries:
  - In Qatar, nontradables inflation moderated from the World Cup-related high level as the boost from the Asian Cup in early-2024 was relatively modest.
  - In Saudi Arabia, nontradables inflation remained elevated, driven mostly by rental prices, against the backdrop of positive non-hydrocarbon output gap.

### Output gap and labor market
- Consistent with moderate levels of unemployment, the aggregate non-hydrocarbon output gap in the GCC remained broadly neutral, helping contain nontradables inflation.
- Unemployment rates fell to pre-COVID-19 levels, indicating the non-hydrocarbon economic cycle returning to the historical norm.

### Fiscal accounts and fiscal stance
- The overall fiscal balance fell by 4 percentage points to somewhat below 6 percent of GDP in 2023.
- The fiscal stance of the median GCC country loosened in 2023 as indicated by the change in the non-hydrocarbon primary balance to non-hydrocarbon GDP ratio, with cross-country variations:
  - Oman continued fiscal consolidation in 2023, worth a nonhydrocarbon primary adjustment of 3 percentage points of non-hydrocarbon GDP.
  - The fiscal stance loosened by ¾–1 percentage point in the UAE and Saudi Arabia (in the latter amid strong investment-related spending) and 1½ percentage points in Qatar.
  - In Bahrain, the momentum for fiscal consolidation slipped in 2023 following significant reductions in the non-hydrocarbon primary deficit since the 2018 adoption of the Fiscal Balance Program (by 9 percentage points to 18 percent of non-hydrocarbon GDP in 2022).
  - The fiscal stance loosened by around 6 percentage points in Kuwait due to the public sector wage bill and subsidies.
- Central government debt as a share of GDP was broadly unchanged in 2023 in the region.
- Figures/indicators referenced: Central Government Debt, 2023 (Percent of GDP); Change in Non-Hydrocarbon Primary Balance (Percentage point of non-hydrocarbon GDP).

### Monetary policy and financial sector
- GCC monetary policy mirrored that of the U.S. Federal Reserve to support the peg; an appropriate policy stance has been maintained.
- Following a sharp tightening cycle between early-2022 and mid-2023, GCC central banks started cutting the policy rate in September 2024, mirroring actions of the U.S. Federal Reserve, consistent with their pegs to the US dollar.
  - Note: In Kuwait, where the dinar is pegged to an undisclosed basket of currencies, the tightening cycle halted in July 2023.
  - Cumulative rate hikes between early-2022 and mid-2023 of 275 basis points were below the 525 basis points in the U.S. Federal funds rate.
- As of mid-2024 the monetary policy stance is assessed to be tight in the GCC countries.
- Financial conditions tightened appropriately; monetary aggregates were kept under control due to improved liquidity management frameworks:
  - UAE: ongoing implementation of the Dirham Monetary Framework (standing facilities, open market operations, reserve requirements).
  - Saudi Arabia: auction mechanism for placement of public deposits with commercial banks, central bank acting as fiscal agent.
  - Oman: establishing an interest rate corridor, initiating open market operations, enhancing central bank capacity as part of the Monetary Policy Enhancement project.
  - Qatar: more effective use of T-bill issuances to absorb excess liquidity.

### Banking sector performance and risks
- Amid decelerating private sector credit, asset quality is strong and banking sectors remain well capitalized and liquid.
- Capital adequacy ratios remain well above regulatory requirements.
- Profitability rebounded from the pandemic low, with return on equity in the range of 5-15 percent, supported by an increase in net interest margins.
- Credit growth decelerated in most GCC countries as higher policy rates passed through to lending rates; cross-country differences reflect idiosyncratic factors:
  - Saudi Arabia: credit growth moderated but remained double digit owing to corporate loan growth and mortgage lending supported by the Saudi Housing Program.
  - UAE: quarterly Credit Sentiment Survey suggests credit demand remained strong despite tightened underwriting standards.
- Asset quality: non-performing loan (NPL) ratios moderate across the GCC.
  - UAE: gross NPL ratio peaked at close to 8 percent and decreased to close to 5 percent in 2023.
- Provisioning against credit losses is prudent, especially in Kuwait and Saudi Arabia where it exceeds the stock of NPLs.
- Funding is dominated by deposits, with the loan-to-deposit ratio below or around 100 percent in four countries.

### Financial markets and capital flows
- Strong performance of GCC financial markets supported by external conditions, robust economic activity, and policies mobilizing financing for Vision programs.
- Equities and IPOs:
  - More than 30 initial public offerings (IPOs) in the first three quarters of 2024 in a total amount exceeding US$5 billion.
  - Saudi Arabia’s Tadawul led in number of IPOs; Dubai Financial Market, Abu Dhabi Securities Exchange, and Oman’s Muscat Stock Exchange led in IPO value.
  - Saudi Aramco’s secondary offering was US$12 billion.
  - Largest IPO in the GCC: OQ Exploration and Production raised US$2 billion on the Muscat Stock Exchange.
- Stock market performance in 2023 and 2024 (as of mid-October 2024) showed divergence:
  - 2023: GCC underperformed the MSCI EM Index (+7 percent); Kuwait (-10.1 percent), Oman (-1.3 percent), Qatar (-0.4 percent), UAE (-3.0 percent); Saudi Arabia (+8.7 percent); Bahrain (+3.4 percent).
  - 2024 (as of mid-October): Bahrain (+13 percent), Kuwait (+3 percent), Oman (+1 percent), UAE (+1 percent), Qatar (-3 percent), Saudi Arabia (-3 percent); EM performance +13 percent.
- Debt securities:
  - Net bond outflows from the GCC: US$2.5 billion in 2023 and US$1.4 billion during January-August 2024.
  - Sovereign spreads broadly stable since early-2023, except declines in Bahrain and Oman (close to 50 and 90 basis points, respectively).
  - 2024 international bond issuances included: US$17 billion by the sovereign in Saudi Arabia, US$9.6 billion by Saudi Arabia’s Public Investment Fund, US$9 billion by Saudi Aramco, US$2 billion by Bahrain, US$5 billion by Abu Dhabi, US$2.5 billion by the Abu Dhabi Development Holding Company, and US$2.5 billion of first-ever green bonds by Qatar.

### External sector and reserves
- Current account surpluses have narrowed owing to oil production cuts and strong investment-related imports:
  - GCC current account surplus: 17.8 percent of GDP in 2022; 11.8 percent of GDP in 2023; expected to further moderate to 9.7 percent of GDP in 2024.
- External balances supported by relatively high hydrocarbon prices and robust non-hydrocarbon exports of goods and services, including tourism:
  - Qatar: peak tourist arrivals during the 2024 Asian Cup exceeded those during the 2022 World Cup.
  - Saudi Arabia: achieved the 2030 goal of 100 million inbound and domestic visitors already in 2023.
- Offsetting factors: strong investment-related imports and extension of oil production cuts to be phased out gradually between the fall of 2024 and late-2025.
- Capital flows and external investments:
  - Inward FDI accelerated in recent years in some GCC countries (Bahrain, Oman, Saudi Arabia, the UAE).
  - GCC countries made sizeable foreign investments and extended financial support to other countries, including announced investments of US$35 billion by the UAE in Egypt and US$5 billion by Saudi Arabia in Pakistan.
  - Examples of foreign asset acquisitions by SWFs and national oil companies cited (e.g., stake in Lenovo and Heathrow Airport by PIF; Truist Insurance Holdings by Mubadala; NextDecade Corporation by ADNOC).
  - Reserve accumulation, especially in the UAE.
- External balance sheets and position:
  - Official reserves remain generally adequate according to standard IMF metrics and GCC countries separately hold large financial assets through SWFs.
  - External position assessment: broadly in line with medium-term fundamentals in Oman and the UAE; stronger in Qatar; weaker than level consistent with fundamentals in Kuwait and Saudi Arabia but still strong given large external buffers.

*Italic: IMF staff summary of section 6.*

### 14. The nominal effective exchange rates appreciated between early-2023 and mid-2024,

### 14. The nominal effective exchange rates appreciated between early-2023 and mid-2024

### Exchange rate developments
- The nominal effective exchange rate (NEER) appreciated across the GCC since early-2023, reflecting movements in the U.S. dollar, with some corrections at the end of the year.
- Real effective exchange rates (REER) were broadly stable because inflation in the GCC was below that of trading partners.
- In 2024:
  - The NEER appreciated further across the GCC.
  - REER divergence emerged:
    - Bahrain and Saudi Arabia: REER remained broadly stable given the continued negative inflation differential.
    - Qatar and the UAE, and to a lesser extent Oman: low inflation led to a depreciation of the REER.
    - Kuwait: nominal appreciation combined with inflation resulted in an appreciation of the REER.

### Outlook and macroeconomic projections
- Medium-term drivers:
  - Stronger non-hydrocarbon activity from reform implementation.
  - A robust hydrocarbon sector.
  - Inflation stabilizing at low levels supported by credible policy frameworks.
  - External sector remaining strong with a gradual narrowing of current account surpluses due to strong domestic investments.
- Risks:
  - Near-term risks are broadly balanced; longer-term risks require policy actions discussed later.

### Growth projections
- GCC overall output growth:
  - Projected rebound to 1½ percent in 2024 (pace somewhat slower than previously expected due primarily to extended oil production cuts).
  - Projected to strengthen to 3½ percent in 2025 as production cuts are gradually unwound.
- Medium-term non-hydrocarbon output growth:
  - Projected at 3½ percent overall.
  - Cross-country medium-term non-hydrocarbon growth ranges:
    - Kuwait and Qatar: 2-3 percent.
    - Bahrain, Oman, Saudi Arabia, and the UAE: 3.5-4.5 percent.
- Economic activity will be supported by a recovery in the hydrocarbon sector.

### Hydrocarbon sector role and natural gas expansion
- Hydrocarbon sector will remain important domestically and globally, supported by:
  - Announced expansions of natural gas production capacities in Oman, Qatar, Saudi Arabia, and the UAE.
  - Lower carbon intensity of GCC oil and gas production relative to many other producers.
  - Cost advantage allowing continued production through the energy transition.
  - Large share of global spare capacity and oil reserves.
- Box 2 — announced/planned natural gas expansions and related metrics:
  - Oman: new train with capacity of 3.8 mtpa and increase LNG production capacity to 15.2 mtpa by 2029.
  - Qatar: currently produces 77 mtpa of LNG; upgraded planned increase from 48 mtpa to 65 mtpa, lifting total to 142 mtpa by 2030 (mostly exported).
  - Overall natural gas production may increase by around 50 percent if production of other gas products expands.
  - Saudi Arabia: set to expand natural gas production by 60 percent.
  - UAE: expand LNG export capacity from 6 mtpa to 15 mtpa.
  - Consistency with IEA “business as usual” scenario (STEPs) up to 2050:
    - IEA (2022) STEPs projections: Qatar and Saudi Arabia set to expand natural gas production by around 90 percent each by 2050; other countries in the Middle East by 30 percent.
    - Middle East projected to expand natural gas production by more than 250 mtpa (or more than 50 percent) by 2050.
- Energy-transition caveats:
  - Under IEA APS (Policy Implementation Scenario), global demand/supply paths differ and planned expansions could lead to “over supply” risks for some countries, notably Qatar.
  - Assessments are sensitive to assumptions on demand (including Asia, AI/data centers), US LNG expansions, and potential disorderly transition scenarios.

### Inflation and external balances
- Inflation:
  - Near term (2024-25): headline inflation expected to be:
    - Above 2 percent in Kuwait.
    - Below 2 percent in Bahrain, Oman, and Qatar.
    - Broadly 2 percent in Saudi Arabia and the UAE.
  - Medium term: headline inflation expected to stabilize at around 2 percent, consistent with medium-term inflation in the US, supported by exchange rate pegs, policy discipline, and elastic expatriate labor supply.
- External balances:
  - Expected to remain strong with cross-country differences reflecting pace and size of investments.
  - Kuwait and Qatar: current account balance expected to record double-digit surplus over the medium term, despite narrowing as hydrocarbon exports decline.
  - Saudi Arabia: large investments expected to result in a modest current account surplus in 2024 and a gradual widening to a deficit over the medium term.
  - Other GCC countries: current account balance expected to remain stable or slightly decline to single-digit surpluses.

### Near-term and medium-term risks and spillovers
- Near-term upside risks:
  - Higher-than-expected oil production from faster reversal of OPEC+ and voluntary cuts.
  - Higher natural gas production/expansion.
  - Higher commodity prices.
  - Accelerated implementation of investment projects and structural reforms.
  - Faster monetary policy easing in advanced economies.
- Near-term downside risks:
  - Global economic slowdown (especially in China) harming hydrocarbon and non-hydrocarbon exports.
  - Higher-for-longer interest rates constraining growth, public finances, and financial stability.
  - Overheating from large projects leading to inflation resurgence.
  - Protracted or broadened conflicts (Gaza and Israel, Red Sea tension) causing volatile hydrocarbon prices, reduced exports, lower tourism and investment, and costlier external funding.
- GCC spillovers to MENA and beyond:
  - US$110 billion remitted out of the GCC in 2023.
  - GCC provided about US$56 billion disbursed from 2020 to 2024Q3 in financing for neighboring countries, with about US$24 billion of new funds committed (including longer-term project loans and investment mainly from the UAE to Egypt).
  - An adverse GCC shock would reduce financial buffers for neighboring countries.
- Key medium-term risks:
  - Geoeconomic fragmentation, energy transition uncertainty, and productivity change (including AI effects and cybersecurity risks).
  - Geoeconomic fragmentation could raise energy prices and trade diversion benefits for the GCC but negatively affect global output.
  - Energy transition outcomes could raise or lower hydrocarbon prices with major implications for external/fiscal balances and financial stability.

### Fiscal policy priorities and consolidation needs
- Policy priorities:
  - Ensure fiscal sustainability while creating space for public investments supporting reforms.
  - Enhance monetary policy transmission near- to medium-term.
  - Safeguard financial stability.
  - Implement structural reforms for strong, sustainable, inclusive growth.
- Fiscal strategy:
  - Medium-term fiscal consolidation focused on non-hydrocarbon revenue mobilization to ensure stability and sustainability and increase resources for growth-enhancing investments.
  - Measures include adopting appropriate fiscal rules, credible medium-term fiscal frameworks, enhanced risk monitoring, and consolidated sovereign asset-liability management frameworks.
- Baseline medium-term fiscal consolidation (projected increase in the non-hydrocarbon primary balance relative to non-hydrocarbon GDP between 2023 and 2029):
  - Qatar and the UAE: around 3½–4 percentage points.
  - Bahrain, Oman, and Saudi Arabia: around 7–8½ percentage points.
  - Kuwait: around 12 percentage points.
  - Most consolidation is expenditure-driven: public investment reduction (Bahrain, Qatar), spending efficiency measures (Saudi Arabia), wage bill containment (Kuwait, Oman, Saudi Arabia), and subsidy rationalization (Kuwait, Oman). Some revenue measures planned (e.g., Bahrain’s global minimum corporate tax in January 2025).
  - Public debt expected to remain moderate and stable in most GCC countries.
- Additional consolidation needed (staff assessment against country-specific PIH anchors and other considerations):
  - GCC countries, except Qatar, need to consolidate beyond baseline projections.
  - Country-specific projected baseline medium-term fiscal consolidation and additional consolidation assessment (Table 1):
    - Bahrain: Baseline medium-term fiscal consolidation 6.8; Additional consolidation needed? Y; Size and pace: Substantial, sustained
    - Kuwait: Baseline medium-term fiscal consolidation 12.2; Additional consolidation needed? Y; Size and pace: Substantial, gradual
    - Oman: Baseline medium-term fiscal consolidation 7.9; Additional consolidation needed? Y; Size and pace: 1.5
    - Qatar: Baseline medium-term fiscal consolidation 4.4; Additional consolidation needed? N; Size and pace: ...
    - Saudi Arabia: Baseline medium-term fiscal consolidation 8.6; Additional consolidation needed? Y; Size and pace: 5, medium term
    - United Arab Emirates: Baseline medium-term fiscal consolidation 3.6; Additional consolidation needed? Y; Size and pace: 3, gradual
  - Rationale: Intergenerational equity and uncertainty around hydrocarbon prices and fiscal space amid geopolitical turbulence and the global energy transition.

*Italic: IMF staff summary from the provided chapter content.*

### 24. With this in mind, and to navigate through elevated uncertainty, GCC countries should

### 24. With this in mind, and to navigate through elevated uncertainty, GCC countries should

### Stability and Sustainability: overarching fiscal framework
- Stability (short term):
  - Fiscal policy should dampen the macroeconomic impact of both the business cycle and the volatility in commodity revenue, remain prudent to avoid procyclicality, and rebuild policy buffers especially during good times.
  - Given somewhat negative to neutral non-hydrocarbon output gaps in many GCC countries, fiscal consolidation is recommended to be gradual or implemented over the medium term.
  - Countries with fiscal space could deploy targeted and temporary fiscal measures.
- Sustainability (long term):
  - Fiscal consolidation is needed to stabilize net government financial assets and achieve intergenerational equity while ensuring space for public investments aligned with the broader reform agenda.
  - This would be supported by a credible medium-term fiscal framework (MTFF) based on PIH, as well as enhanced fiscal risk analysis and institutions.

### Fiscal Consolidation: revenue mobilization and tax reforms
- Focus: continue to prioritize non-hydrocarbon revenue mobilization and implement key fiscal reforms to exploit significant gaps relative to potential tax revenue.
- VAT:
  - Recommendation: introduce a broad-based VAT (Kuwait, Qatar), especially when a favorable medium-term outlook provides opportunities (robust non-hydrocarbon output growth and moderate inflation).
  - In other GCC countries, the VAT base could be further broadened, including by rationalizing tax expenditures.
- CIT:
  - The UAE implemented a general federal corporate income tax (CIT) of 9 percent in June 2023.
  - Recommendation: consider a CIT for domestic firms—with an appropriate threshold—in other countries (Kuwait, Qatar).
  - Adoption of the global minimum CIT would help increase non-hydrocarbon revenues further; complement with a thorough review of existing tax incentives (including in Special Economic Zones) to avoid tax leakages.
- Other taxes:
  - Reduce tax complexity to boost collection; explore property taxes, luxury taxes, or environmental levies to support revenue mobilization alongside diversification.
- Tax administration:
  - Enhance efficiency where tax revenue lags non-hydrocarbon output growth.
  - Ongoing reforms include electronic invoicing (Oman, Saudi Arabia), expansion of taxpayer registry (Oman), capacity enhancement of the tax authority (the UAE), digitalization and realignment of customs procedures with international best practices (Saudi Arabia).
  - VAT introduction would lay the foundation for greater revenue diversification by facilitating introduction and administration of other taxes (Qatar).

### Public spending efficiency and subsidy reform
- Improve efficiency of and rationalize public expenditure:
  - Median wage was somewhat below EM and OECD levels as a share of GDP (around 8 percent of GDP in 2022), though more volatile due partly to greater variation in GDP.
  - Subsidies were relatively high, about 6 percent of GDP in 2023.
- Rationalizing public wage bill and boosting investment efficiency:
  - Actions include efficient provision of new public services (Qatar), civil service reform and natural attrition (Saudi Arabia).
  - Gradually align public sector wages with private sector to reduce public-private wage premia (Bahrain, Kuwait, Oman, Saudi Arabia).
  - Strengthen public investment management framework; use IMF’s Public Investment Management Assessment (PIMA) to design action plans to bolster infrastructure governance and enhance public investment effectiveness.
- Continuing subsidy reforms:
  - Rationalization will generate fiscal savings, promote efficient energy and water consumption, support climate ambitions, and allow higher hydrocarbon exports and revenues.
  - Examples and recommendations:
    - Qatar: energy subsidies have fallen after previous reforms, but further steps include lifting remaining caps on gasoline and diesel prices, gradually aligning domestic natural gas prices with global prices, and progressively phasing out remaining subsidies for electricity and water with targeted support to the vulnerable.
    - Saudi Arabia: recent steps (e.g., increase in diesel prices) reduced subsidies, but further progress is needed including removing the cap on gasoline prices.
    - Oman: removing the cap on gasoline prices should be a policy priority.
    - UAE: liberalized fuel prices in 2015 and provides targeted support to those in need—could serve as a model.

### Fiscal Rules and Institutions
- Establish a formal fiscal anchor and operational rules:
  - A long-term fiscal anchor based on the Permanent Income Hypothesis (PIH) would guide the trajectory of fiscal consolidation and ensure intergenerational equity.
  - Operational fiscal rules translate the anchor into annual budget constraints and should be designed to de-link spending from hydrocarbon price volatility.
- Implementing a credible fiscal rule requires:
  - Developing a credible and operational MTFF:
    - Examples: Qatar’s and Saudi Arabia’s 3-year budget frameworks; Oman’s medium-term fiscal plan with binding spending envelopes.
    - Next step: full-fledged MTFF with longer horizons, credible macroeconomic projections, clear medium-term fiscal anchors, integration into annual budget process, and a fiscal risk statement.
    - Bahrain: a pre-committed medium-term adjustment path would enhance policy credibility.
  - Credible monitoring and design mechanisms:
    - Independent fiscal institutions (fiscal councils) can assess fiscal plans/performance, evaluate forecasts, monitor implementation, foster compliance, and promote transparency.
    - Example: UAE’s Government Financial Policy Coordination Council (established 2008) coordinates policy and could be leveraged further to improve fiscal coordination across the public sector.
    - Key elements for fiscal institutions: strong capacity, proficiency, operational independence, and access to timely information.
  - Enhanced fiscal transparency:
    - Saudi Arabia: expanded Budget Statement, higher frequency reports, publication of PIF financial statements, improved public procurement transparency.
    - Recommendation: regular publication of MTFFs, general government budgets and reconciliations, sectoral fiscal statistics, hydrocarbon revenue management strategy, and public sector balance sheet; bring extrabudgetary spending above the line (e.g., Bahrain).

### Fiscal risk statements and sovereign SALM
- Fiscal risk statements:
  - Incorporate a fiscal risk statement accounting for a range of shocks (hydrocarbon dependence, hydrocarbon price volatility, spending surprises, unrealized forecasts, contingent liabilities from government-related entities, climate-related physical and transition risks).
  - Preparing a fiscal risk statement with the budget (as in Oman, Saudi Arabia, or emerging economies such as Indonesia, South Africa) helps inform mitigation measures and provisioning for potential fiscal costs.
- Sovereign asset-liability management (SALM):
  - Developing SALM frameworks would enhance fiscal efficiency, debt management, and investment strategies.
  - Regional SWFs have boosted international bond issuance and investments abroad, and increased involvement in the domestic economy (Oman, Saudi Arabia, the UAE).
  - Higher SWF exposure to the domestic economy could reduce ability to safeguard long-run financial wealth and create new transmission channels of shocks.
  - Assessing sustainability and vulnerability of broader public finances requires information on public sector balance sheets.
  - Oman, Saudi Arabia, and the UAE are taking initial steps by compiling data on public sector financial assets and liabilities; further efforts are important given increasing role of SWFs and SOEs in capital expenditures.

### Operational fiscal rules: guidance and design considerations (Box 3 summary)
- Fiscal anchor: PIH-based anchor defined as the non-hydrocarbon primary balance consistent with the sustainable flow of income from net wealth (net financial wealth plus resource wealth).
  - Net wealth should be constant with composition changes over time—lower hydrocarbon revenue offset by higher net financial wealth saved/invested—to safeguard intergenerational equity.
- Operational fiscal rules experience in the GCC:
  - Bahrain: extended Fiscal Balance Program targeting a balanced state budget by 2024.
  - Oman: modified MTFF to focus on fiscal sustainability.
  - Saudi Arabia: experimenting with a structural fiscal rule based on multi-year smoothing of oil prices in real terms.
  - UAE: uses multiple fiscal rules at central and local government levels.
- Design considerations:
  - Fiscal rules should constrain excessive deficits and prevent unsustainable debt dynamics while allowing discretion to pursue policy priorities and respond to shocks.
  - Effectiveness depends on design, legal status, enforceability, and institutional strength.
  - Rules should be consistent with the long-term fiscal anchor and size of fiscal buffers, include escape clauses, be enshrined in legislation, and detail circumstances for amendment to ensure flexibility.
  - Evidence for RRCs: by 2021, 30 out of 57 RRCs had adopted a fiscal rule (Apeti et al. 2023); revenue rules can matter for smoothing procyclicality, though results warrant caution due to sample size.

### Monetary and exchange rate policies: enhance monetary policy transmission
- Exchange rate pegs:
  - Pegs remain appropriate and have delivered relatively low and stable inflation; they continue to be appropriate nominal anchors given GCC economic structures.
  - External position improvements (fiscal consolidation, competitiveness-enhancing reforms) support central banks’ ability to maintain pegs.
- Enhance liquidity management frameworks to improve monetary policy transmission:
  - Monetary policy in the GCC has mirrored the U.S. Federal Reserve but domestic interest rate and liquidity conditions have been affected by factors such as hydrocarbon prices, non-hydrocarbon revenue mobilization, or rapid credit growth (example: episodes of liquidity squeeze in Saudi Arabia in 2022).
  - As U.S. monetary policy eases, GCC countries should follow and continue improving management of domestic monetary conditions.
  - Policy focus: continuous improvement in liquidity management frameworks via appropriate standing facilities, market-based approaches for liquidity management accompanied by effective liquidity forecasting methods, and transparency on monetary policy operations.

*Source: ppea2024066 - 24. With this in mind, and to navigate through elevated uncertainty, GCC countries should*

### 32. Deeper domestic financial markets would enhance monetary policy transmission.

### 32. Deeper domestic financial markets would enhance monetary policy transmission.

### Development of domestic financial markets
- Continued issuance of local currency sovereign debt will support capital market and yield curve development.
- Domestic corporate bond markets could be deepened through further development of green bond and sukuk markets.
- Structural challenges (e.g., need for longer maturities, collateral, and refinancing) can be addressed by the relevant authorities.

### Financial sector policies to maintain financial stability
- Focus: adapt to and mitigate both ‘old’ risks (e.g., rapid credit growth, concentration of exposures, sovereign-bank nexus, NPLs in certain segments, activities of subsidiaries abroad) and ‘new’ risks (e.g., digitalization).
- Key supervisory priorities:
  - Closely monitor banks’ capital, liquidity, and asset quality.
  - Conduct regular stress tests, including for emerging risks from the changing interest rate environment (e.g., the impact of US monetary policy easing), rapid credit growth, concentration of exposures (e.g., real estate), sovereign-bank nexus, and increasing activities of subsidiaries abroad.
  - Where appropriate, consider a positive neutral counter cyclical capital buffer—zero at present—in Oman, Saudi Arabia, the UAE.
  - If significant risks are identified, recalibrate macroprudential policies that have been actively used in the GCC (see Table 2).
  - Reduce data gaps to improve risk monitoring (e.g., development of real estate price indices).

### Emerging vulnerabilities and cross-border exposures
- Some vulnerabilities have emerged in certain segments of the banking sector despite systemic stability.
  - Concentration of banking sector exposure in some GCC countries:
    - Assets: e.g., real estate sector in Saudi Arabia and the UAE; claims on the government in Qatar.
    - Liabilities: e.g., government deposits in Oman and Saudi Arabia.
  - Strengthening of the sovereign-bank nexus on the liability side could amplify systemic shocks, including from oil price volatility.
  - Aggregate NPLs moderated in the UAE but remain high in the construction sector.
  - Signs of significant price growth in some segments of the real estate sector.
  - A few banks in the GCC have sizeable exposure to Egypt and Türkiye, ranging from 3 to 20 percent of their total assets and from 1 to 15 percent of their net income, through their subsidiaries, highlighting potential cross-border spillovers.

### Fintech, CBDCs, and digitalization risks
- Fintech sector developments:
  - Regulatory sandboxes across the GCC.
  - Licensing of digital banks in Saudi Arabia and the UAE.
  - Creation of FinTech Hubs: Bahrain, Qatar, Saudi Arabia; Innovation Hub “Wolooj” in Kuwait; DIFC FinTech Hive (UAE).
- CBDC exploration:
  - Bahrain, Oman, Saudi Arabia, and the UAE are leading CBDC exploration.
  - While CBDCs can enhance monetary policy transmission, they might pose risks to the financial sector (including drawing deposits away from banks).
  - A cautious approach is warranted: conduct careful cost-benefit analyses and explore risks related to financial stability.
- Cybersecurity and third-party risks:
  - Strengthen cybersecurity protocols through national and GCC-wide strategies, formulate minimum standards, perform periodic stress tests, and assess/mitigate risks from third-party service providers.
- Regulation:
  - Continue applying a mix of activity- and entity-based regulation proportionate to the size, complexity, and risk profile of fintech firms.

### Compliance with international standards and supervisory modernization
- Priorities:
  - Formalize emergency liquidity assistance (ELA).
  - Establish deposit insurance schemes.
  - Operate a comprehensive bank resolution framework.
  - Enhance AML/CFT regimes in line with FATF standards, particularly risk-based supervision of virtual assets and virtual asset service providers (VASPs).
    - Example: removal of the UAE from the FATF “grey list” in February 2024 following major AML/CFT enhancements.
  - Modernize regulatory and supervisory frameworks:
    - Fully implement the Basel III final reforms.
    - Adopt IFRS9 reporting requirements where still needed.
    - Shift supervision towards a more risk-based approach.

### Structural context and implications for policy
- Diversification and sustainable development:
  - The GCC has made progress on economic diversification and SDGs, but reliance on the hydrocarbon sector remains high.
  - Non-hydrocarbon economy shares: 60-65 percent in Kuwait, Oman, and Qatar; about 75 percent in the UAE; around 85 percent in Bahrain.
- Constraints on non-hydrocarbon growth:
  - Weak total factor productivity (TFP) growth.
  - Further capital deepening constrained by moderate inward FDI and capability/market failures.
  - Labor force adaptation impaired by skills mismatches and labor market segmentation.
- Sovereign Wealth Funds (SWFs) and capital:
  - Estimated exposure of SWFs to the domestic economy reached around 40 percent of their assets under management in 2024, well above the average of 16 percent in other regions.
- Policy levers to boost productivity and diversification highlighted in broader analysis:
  - Safeguard macroeconomic stability, facilitate digitalization, enhance public sector efficiency, and increase private-sector participation to support TFP growth.
  - Attract more foreign capital, especially FDI, to support growth, diversification, and technology transfer.

*International Monetary Fund — Chapter: Deeper domestic financial markets would enhance monetary policy transmission (from ppea2024066).*

### Box 4. What Drives Productivity Growth in the GCC amid Economic Diversification?

### Box 4. What Drives Productivity Growth in the GCC amid Economic Diversification?

### Drivers of TFP Growth (summary of Box 4, Figure 2)
- Estimated impacts (coefficients; significance indicated in source):
  - ***1.8
  - ***1.4
  - *0.94
  - *0.90
  - *0.85
  - 0.80
  - 0.6
  - **-2.2
- Importance by region (percentage contribution to variation explained, ME&CA coefficients converted into contributions):
  - Digitalization: 10.9
  - Macro Stability: 10.3
  - Trade Complexity: 5.9
  - Institutional Quality: 5.0
  - Capital Account Openness: 6.4
  - Labor & Inclusion: 5.6
  - Financial Integration: 3.1
  - State Footprint: 12.5
- Variable definitions (as in source note):
  - Digitalization = digital infrastructure and access
  - Macro stability = deviations of inflation and real GDP growth from their long-term averages
  - Trade complexity = diversity and sophistication of exports
  - Institutional quality = quality of institutions and regulatory frameworks
  - Capital account openness = extent to which a country allows and/or attracts cross-border capital flows
  - Labor & inclusion = labor force quantity and quality, and labor market reforms to promote inclusiveness
  - Financial integration = development of financial markets and institutions
  - State footprint = extent and effectiveness of government intervention
- Technical details reference: see Chapter 2 online appendix of IMF Regional Economic Outlook – Middle East and Central Asia (October 2024) (as cited in source).

### Export Diversification: Where do GCC Countries Stand? (Box 5)
- Key messages:
  - GCC countries have made important progress in diversifying exports over past decades but room remains to increase share of non-hydrocarbon exports (NHM exports).
  - Export concentration has declined sharply for most GCC countries; per-capita NHM exports have risen.
  - Per-capita services exports increased unevenly: Bahrain, Qatar, and the UAE are well above other GCC countries and some resource-rich comparators.
  - Information and communication technology exports remain relatively small despite recent progress.
- Growth payoff of diversification:
  - A 10 percent rise in real per-capita exports of products with high complexity is associated with a 0.4 percentage point increase in real per-capita GDP growth (regression result cited in source).
  - Positive and significant relationship between per-capita services exports and medium-term output growth.
- Remaining gaps and comparisons:
  - Export concentration in Kuwait, Oman, Qatar, and Saudi Arabia remains higher than in comparator countries—around 0.5—suggesting more effort needed to expand non-hydrocarbon exports.
  - Export concentration of Bahrain and the UAE is broadly comparable to non-GCC resource-rich countries such as Australia, Malaysia, and Norway.
  - Per-capita NHM exports in GCC countries remain subdued relative to Australia, Chile, Malaysia, Mexico, and Norway.
  - Apart from the UAE, GCC countries lag in per-capita manufacturing exports that create higher value added and jobs.
  - Exports of products with higher complexity are comparable to Malaysia, Norway, and Mexico only in Bahrain and the UAE.
- Definition from source:
  - Complex products = products with a “Product Complexity Index” (PCI) above zero. Examples: electronics, precision instruments, and advanced machinery (Hidalgo and Hausmann, 2009).

### Indicators of Economic Diversification and Growth Impact (Box 5, Figure 1)
- Economic Diversification Index (2000 and 2020-22 average): charts show top 10, average, UAE BHR QAT SAU OMN KWT bottom 10 average; source: Global Economic Diversification Index 2024.
- Export Concentration Index (2001–05 vs 2018–22): scale between 0-1, higher = greater export concentration; GCC and peers plotted.
- Per-capita Services Exports (US$ thousands): 2005 vs 2019 comparisons by country; GCC vs peers.
- Output growth and exports of complex products: regression line y = 0.0155x + 0.1969 linking log per-capita exports of high-complexity products (2019 US$) to 5-year ahead real per-capita GDP growth (percent).

### Policy areas supporting diversification (summary)
- Comprehensive reform agenda supports economic diversification, with policies focused on:
  - Industrial policies (IP) targeting manufacturing.
  - Business climate reforms (laws, investment codes, governance frameworks, IP strengthening, privatization).
  - Labor market and human capital reforms.
  - Digitalization and infrastructure improvements.
- Operational guidance for industrial policies (from source):
  - Target market and capability failures; minimize risks/distortions; ensure WTO compliance.
  - Include rigorous calibration and monitoring, cost-benefit analysis, clear exit criteria, sunset clauses, and integration into broader reform agenda.
  - Avoid discriminatory provisions (e.g., local content requirements in government contracts) that could cause allocation distortions or provoke trade partner retaliation.
  - Focus IP on export diversification, especially sophisticated sectors.

### Selected industrial policy measures in the GCC (Table 3 highlights from source)
- Oman: Plans to develop 5 business clusters to integrate SMEs into domestic and international value chains.
- Qatar: Numerous special economic and free zones, industrial parks, and the Qatar Financial Center combined with financial and sector specific incentives to boost FDI and trade.
- Saudi Arabia:
  - Four special economic zones established in 2023 to attract FDI in manufacturing and emerging technologies through tax incentives and the option for full foreign ownership.
  - PIF, Aramco, and Baosteel agreed to establish an integrated steel plate manufacturing complex.
  - Saudi Eximbank agreed to provide financing to ACWA Power.
  - Modon agreed to provide funds for establishing Vaccine Industrial Company.
- UAE: More than 40 free economic zones where companies may qualify for a 0% rate on qualifying income, conditional on meeting all relevant conditions to be considered as a Qualifying Free Zone Person; customs or VAT reliefs in designated free zones.
- GCC-wide trade measures: Definitive antidumping duty on imports of super absorbent polymer from Belgium, China, France, Korea and Singapore; initiation of antidumping investigation on imports of certain electrical connectors, switches, sockets and plugs from China.
- Aggregate note: More than 50 IP measures documented in the GCC over the past two years, predominantly subsidies and trade policy measures, with focus on manufacturing (Figure 22).

### Business climate recommendations (from source)
- Continue reforms to enhance business climate, including:
  - Enactment or updates of laws: new law on civil transactions, new investment code, forthcoming commercial transactions law.
  - Development of national governance framework to streamline fees and levies (Saudi Arabia).
  - Strengthening of intellectual property laws (UAE).
  - Significant privatization efforts (e.g., divestment of nine SOEs in 2023 and plans to divest more than 30 state-owned assets during 2024-28 in Oman).
  - Intensify reforms to reduce bureaucracy and improve access to financial services and credit, including upgrading credit scoring methods.

### Labor market and human capital (policy priorities and interventions)
- Policy priorities (as stated in source):
  - Contain public sector employment.
  - Facilitate employment of nationals in the private sector.
  - Lift nationals’ skills by aligning education with labor market needs.
  - Improve labor market flexibility.
  - Enhance women’s role at work and in society.
- Key interventions undertaken (Box 6 summary):
  - Containing public sector employment via revising salaries and benefits while improving efficiency with greater digitalization (Saudi Arabia); facilitating voluntary retirement (Bahrain); aligning public sector working conditions with private sector (UAE); scholarships for citizens to relocate from public to private sector jobs (Qatar).
  - Facilitating employment of nationals via quotas for private sector employment (many GCC countries); programs to bridge public-private wage differences for nationals (Kuwait, Qatar, Saudi Arabia, and the UAE) and between nationals and expatriates in the private sector (Bahrain, Oman); incentives for hiring nationals (Oman, Saudi Arabia, and the UAE); additional benefits to firms exceeding Saudization targets (Saudi Arabia).
  - Lifting nationals’ skills via aligning education with labor market needs (Qatar and Saudi Arabia), international partnerships for higher education; apprenticeship programs (Bahrain and the UAE); vocational training programs (Kuwait); the large-scale Human Capability Development program aimed at promoting training for 1.7 million participants; mandating employers to design policies for training and upskilling employees (Saudi Arabia); on-the-job training initiatives.
- Labor market outcomes illustrated in Box 6, Figure 1 (indicators from source):
  - New private sector jobs have largely been taken by foreign workers (panel 1: private sector jobs, expatriate workers, percent of total net job creation during 2002-2022).
  - Public sector wages tend to be above private sector counterpart (panel 2: public sector wage premium, percent, 2023 or latest).
  - More nationals have taken private sector employment over time (panel 3: percent of total employment of nationals in 2002, 2011, 2022).

*Source: IMF Staff calculations and figures as presented in the provided content unit.*

### Box 6. Labor Market Reforms in the GCC (concluded)

### Box 6. Labor Market Reforms in the GCC (concluded)

### Training and skills upgrading
- Training initiatives noted: targeted programs in Bahrain and the UAE; trainings for oil and gas workers on technologies in the hydrogen sector (the UAE); a strategy to develop future-ready skills, particularly in areas such as information technology, cybersecurity, and the use of AI in teaching methods (Qatar, the UAE).
- Policy implication: It remains crucial to upgrade skills in the labor market to respond to technological adoption and AI exposure.

### Labor mobility, visas, and social protection for expatriates
- Measures to improve labor market flexibility:
  - Allowing greater flexibility for expatriates to change jobs and transfer employment without requiring employer consent (most GCC countries).
  - Investor visa programs offering residency for expatriates with real estate investments (Bahrain, Oman, Qatar, and Saudi Arabia).
  - Extending golden visas to entrepreneurs, professionals, and job seekers with the right academic credentials (the UAE).
  - Pensions system reform to improve social security and end-of-service benefits for expatriates to attract high-skilled labor (Oman).

### Enhancing women’s participation in the labor force
- Legal and workplace reforms:
  - Prohibiting employment and wage discrimination based on gender and opening previously male-only jobs to women (Bahrain, Qatar, Saudi Arabia, and the UAE).
  - Subsidizing childcare for working mothers (Bahrain, Saudi Arabia).
  - Extending maternity leave and provision for nursing hours (Kuwait, Oman, and Saudi Arabia).
  - Providing transportation to working mothers (Saudi Arabia).
  - Flexible work arrangements such as part-time and remote work options (Kuwait, Oman, Qatar, Saudi Arabia, and the UAE).
  - Female leadership programs, including quotas for female representation in government advisory bodies and councils, and guidance for private sector entities to promote women in leadership positions (Saudi Arabia and the UAE).

### Digitalization and AI: opportunities and risks
- Projected economic impact:
  - AI could boost GDP by around 35 percent by 2030 in the UAE.
  - AI could constitute more than 12 percent of GDP by 2030 in Saudi Arabia.
  - Potential challenge: exposure of almost 40 percent of global employment to AI.
- Digitalization progress:
  - Significant acceleration in digitalization across the GCC in recent years as measured by the Enhanced Digital Access Index (EDAI), with Qatar, Saudi Arabia, and the UAE on par with AEs.
  - In terms of digital adoption in the public sector, Saudi Arabia and the UAE ranked third and fourth, respectively, globally in 2022 based on the GovTech Maturity Index (GTMI).
- GCC AI initiatives and targets:
  - The UAE: AI and Digital Economy Strategies; National Program for AI; establishment of the Ministry of AI and the UAE AI Council; active efforts to attract foreign capital and know-how (example noted: investment by Microsoft in AI company G42 of Abu Dhabi).
  - Saudi Arabia: national AI strategy aiming to attract US$20 billion in investment, train 20,000 data and AI experts, establish 300 active AI startups, and become a global AI and data leader by 2030.
- Policy implications:
  - Conduct careful risk assessment to ensure ethical and responsible AI practices.
  - Regularly evaluate the effectiveness of implementation strategies.
  - Upgrade labor market skills in parallel with AI adoption.

### Trade integration and export orientation
- Rationale: Given limited domestic market size, export orientation is critical for economic diversification.
- Trade integration measures and initiatives:
  - Relatively low tariffs and nontariff barriers as indicated by perception-based indicators, and high-quality infrastructure and regulatory environment.
  - Efforts to boost tourism (example: Saudi Arabia’s memorandum of understanding with Bahrain and Oman; GCC plans for a unified visa for tourists and businesspeople to allow entry to all GCC countries).
  - Exclusion of GCC countries from each other’s local content requirements to support within-GCC trade and value chain integration.
  - Negotiations for FTAs and CEPAs (example: an FTA between Oman and India is being negotiated; FTAs with East African countries under consideration).
  - Agreement among Bahrain, the UAE, Egypt, and Jordan on joint EV production for local markets.
  - Broader engagement: accession of the UAE to the BRICS and commitments to the development of the India-Middle East Europe Economic Corridor (IMEEC) noted.

### Financial integration and attracting FDI
- Objective: Enhance financing sources to support diversification and improve access to technology and know-how.
- Observations:
  - Initiatives to increase the attractiveness of the region for foreign investors are under way; some have borne fruit (e.g., sharp increase in foreign investment licenses in Saudi Arabia), but inward capital flows, especially FDI, remain modest in most GCC countries.
  - Key factors to attract FDI: greater financial depth, higher human capital, quality institutions, and labor market flexibility.
- Policy recommendations to deepen financial integration:
  - Reforms in banking systems and capital markets.
  - Specific measures noted include streamlining bank regulations, loosening bank licensing restrictions, facilitating establishment of branches in other GCC countries, creating a pan-GCC stock exchange, cross-listing companies, and harmonizing listing requirements, disclosure standards, and trading rules.
  - Investments in modern trading platforms, clearing and settlement systems, and robust data dissemination would be beneficial.
- Benefit for sovereign asset management:
  - Greater reliance on more stable foreign funding would allow SWFs to reorient investments to better safeguard buffers for macroeconomic and financial stability and intergenerational equity.

### Climate transition and renewable energy
- Commitments and targets:
  - At COP28 (hosted by the UAE in 2023), GCC countries reiterated commitment to global climate transition efforts.
  - Bahrain, Kuwait, Saudi Arabia, and the UAE had previously announced net zero emission targets by 2050 or 2060; all GCC countries have pledged to reduce emissions considerably over the next decades.
  - Saudi Arabia spearheads the Middle East Green Initiative (MGI).
- Renewable and low-carbon projects:
  - Investments in solar across the GCC and wind power projects such as Kuwait's Shagaya Wind Power Plant (10 MW), Oman's Harweel Wind Power Plant (50 MW), and Saudi Arabia's Dumat Al Jandal (400 MW).
  - Hydrogen initiatives: eight green hydrogen projects in Oman; blue hydrogen plans in Saudi Arabia.
  - Green bond issuances have increased and diversified resources for climate policies.
- Further policy actions recommended:
  - Rationalization of energy subsidies to incentivize energy conservation and improve returns on investment in renewable energies.
  - Support green finance through government initiatives and integrating green finance into investment decisions.
  - Enforce green investment disclosure standards.

### Concluding economic outlook and policy priorities
- Outlook:
  - Near term: economic activity supported by gradual phasing out of oil production cuts.
  - Medium term: domestic activity to benefit from strengthening non-hydrocarbon activity on the back of reform implementation and a robust hydrocarbon sector; inflation expected to stabilize at a low level supported by credible policy frameworks.
  - External sector: expected to remain strong with a gradual narrowing of current account surpluses on the back of strong investments.
  - Risk assessment: Risks around the mildly favorable outlook are broadly balanced in the near term; more challenging medium-term risks warrant policy action.
- Short-term policy recommendations:
  - Fiscal policy should remain prudent to avoid procyclicality.
  - Monetary policy should be consistent with the currency pegs while enhancing the effectiveness of its transmission.
  - Financial sector policies should monitor and respond to emerging risks.
- Medium-term policy recommendations:
  - Fiscal consolidation with a focus on non-hydrocarbon revenue mobilization (especially in the context of global corporate taxation initiatives) to ensure stability and sustainability and to boost space for growth-enhancing investments.
  - Adoption of appropriate fiscal rules and credible medium-term fiscal frameworks.
  - Enhanced risk monitoring and consolidated sovereign asset-liability management frameworks.
  - Full implementation of ambitious reform agendas.
  - Continued increase in trade and financial integration to reap reform dividends, enhance resilience to geoeconomic fragmentation, and benefit from potential trade diversion.

### IMF collaboration and support
- IMF engagement:
  - Stronger IMF-GCC collaboration would complement member states’ efforts to bolster macroeconomic stability and resilience.
  - IMF country teams and experts, including through the new Regional Office in Riyadh and active engagement of the Center for Economics and Finance (CEF) in Kuwait, stand ready to support reforms via surveillance, analytical work, and capacity development.
  - GCC member states have played an important role in supporting regional macroeconomic stability for the broader MENA region; enhancing cooperation between the IMF and the GCC is critical amid global headwinds and rising regional vulnerabilities.

*Source: Box 6. Labor Market Reforms in the GCC (concluded), ppea2024066.*

### Annex I. The Global Minimum Corporate Tax under Pillar Two

### Annex I. The Global Minimum Corporate Tax under Pillar Two

### Overview and context
- GCC countries are members of the OECD/G20 Inclusive Framework on BEPS alongside 141 other jurisdictions and are committed to reforms affecting multinationals.
- Pillar Two would establish a global minimum effective tax of 15 percent on profits of relatively large multinationals (in-scope: group turnover of at least EUR 750 million).
- The global minimum corporate tax is estimated to raise global CIT revenue by 5.7 percent (IMF, 2022).
- The minimum tax is governed by the Global Anti-Base Erosion Rules (GloBE). The SBIE (substance-based income exclusion) will, after a transition period, exempt 5 percent of each of payroll and tangible assets from the minimum tax base.
- Estimates suggest about 19 percent of the global profit of multinationals would be subjected to the top-up tax (IMF, 2022).

### Current CIT landscape in the GCC
- Most GCC countries already have corporate income tax (CIT) in place, but effective rates are often much lower because of tax exemptions and holidays.
- Standard statutory CIT rates cited:
  - UAE’s new general CIT: 9 percent (for financial years starting on or after June 2023).
  - Saudi Arabia: 20 percent.
- The CIT in some GCC countries applies only to the share of profits attributed to non-GCC residents; Saudi and GCC residents pay Zakat (generally 2.5 percent on the stock of net wealth), which is explicitly recognized as a tax under the GloBE rules.
- Tax holidays and preferential regimes are common across the GCC, and in many cases these effectively imply a very low CIT, so the Pillar Two top-up tax will likely apply to most in-scope multinationals in the region.
- Bahrain announced in September 2024 the introduction of a 15 percent Domestic Minimum Top-up Tax for large multinational enterprises effective January 2025.

### Implications of Pillar Two for the GCC
- Pillar Two creates an opportunity for wider CIT reforms in the GCC as members must respect implementation by others even if they do not implement the minimum tax themselves.
- The minimum tax subjects in-scope multinationals to a 15 percent effective minimum, and absent domestic top-up collection (e.g., QDMTT), top-up taxes may be collected in other jurisdictions that implement Pillar Two.
- The QDMTT (Qualifying Domestic Minimum Top-Up Tax) allows the hosting GCC country to collect top-up taxes payable on profits of in-scope entities in its jurisdiction rather than in another jurisdiction.
  - The QDMTT per se does not put a country at an investment disadvantage because in-scope companies will otherwise be taxed at 15 percent effective elsewhere if their parent or intermediate holding company is in a jurisdiction that implements Pillar Two.
  - In-scope multinationals must undertake minimum tax calculations irrespective of the specific policy of any host country, so adoption of QDMTT does not add compliance costs.

### Policy considerations and reform recommendations
- Collect additional revenue without creating disincentives to multinationals:
  - Consider adopting a QDMTT to retain top-up tax revenue domestically.
- Address CIT distortions:
  - Aim for a CIT design that does not affect the decision to undertake investment at the margin and is neutral with respect to financing modality (debt or equity).
  - Recognize that an efficient system still taxes economic rent (returns above the opportunity cost of investment).
- Increase efficiency and effectiveness of tax incentives:
  - Replace tax holidays and profit-based preferential regimes with cost-based incentives such as accelerated depreciation and investment tax credits.
  - Cost-based incentives directly target investment cost and reduce the likelihood that top-up taxes are collected abroad.
- Regional coordination:
  - Regional CIT coordination can reduce tax competition and profit shifting within the GCC and facilitate administrative cooperation on tax matters between GCC countries.
- Consider adopting further GloBE rules as appropriate for domestic policy objectives.

### Key statistics and technical terms (as presented)
- In-scope threshold: EUR 750 million group turnover.
- Minimum effective tax rate under Pillar Two: 15 percent.
- Estimated global CIT revenue increase from the minimum tax: 5.7 percent.
- SBIE exemption: 5 percent of each of payroll and tangible assets.
- Share of global profit subject to top-up tax (estimate): about 19 percent.
- Number of other jurisdictions in Inclusive Framework alongside GCC members: 141.
- UAE new general CIT statutory rate referenced: 9 percent (for financial years starting on or after June 2023).
- Saudi Arabia statutory CIT rate referenced: 20 percent.
- Zakat referenced: generally 2.5 percent on the stock of net wealth.
- Bahrain policy action: announced in September 2024 a 15 percent Domestic Minimum Top-up Tax effective January 2025.

*Prepared by Shafik Hebous (FAD); content based solely on the supplied Annex I text.*

### Annex III. Figure 1. GCC: Net Capital Flows

### Annex III. Figure 1. GCC: Net Capital Flows

### Capital flows overview and hydrocarbon link
- Net capital flows (including reserve accumulation) have been driven by the hydrocarbon balance.
- Surpluses led to reserve and other foreign assets accumulation before 2015, and predominantly other assets in the most recent episode.
- Note: Net capital flows do not include either flows in the capital account or Errors & Omissions.

### Inward and outward FDI: recent trends and cross-country differences
- Inward FDI:
  - Followed moderate levels of "1-1.5 percent of GDP" in the aftermath of the 2015-16 oil price shock.
  - Picked up, "exceeding 2 percent of GDP on average between 2020-23" in the GCC.
  - Aggregate increase largely driven by Bahrain, Oman and the UAE: "around 5 percent of GDP between 2020-23 up from 2-3 percent of GDP between 2014-19".
  - Rest of the GCC continued to record modest inward investments.
  - Recent sharp increase in foreign investment licenses in Saudi Arabia indicates potential for a pick-up in FDI.
- Outward FDI:
  - Has also increased in recent years, driven largely by Kuwait and the UAE.
  - Kuwait invested a large part of the hydrocarbon revenue windfall abroad in the form of FDI.
  - UAE increasingly undertaking foreign investments in strategic sectors and extending support to other countries.

### Portfolio and other capital flows
- Inward portfolio and other investments increased only moderately in recent years.
  - Inward portfolio investments increased slightly in Bahrain and remained broadly unchanged in the rest of the GCC during 2020-23.
  - Sizable international bond issuances and initial public offerings in 2024 (including the secondary offering of Saudi Aramco) might result in a pick-up in inward portfolio investments.
  - U.S. investors have continuously increased exposure to GCC debt and equity markets in recent years, with U.S. investments in GCC equity and debt securities leveling off in 2022-2023.
- Other capital flow notes:
  - Foreign bank claims on the GCC picked up in recent periods.
  - GCC outward portfolio investments into U.S. long-term securities "have increased by 50 percent since 2020".
  - Kuwait’s sale of other foreign assets resulted in an inflow of capital.

### Net international investment position (NIIP)
- GCC NIIP:
  - Remained strong, hovering "around 200-250 percent of GDP in the early-2020s".
  - Assets dominated by debt and portfolio equity assets; liabilities consisting of debt and FDI liabilities.
  - Large cross-country differences: NIIP ranges "from above 500 percent of GPD in Kuwait to slightly negative in Oman".
  - Composition differences: portfolio equity assets constitute a large part of foreign assets in Kuwait, Qatar, Saudi Arabia, and the UAE, but are modest in Bahrain and Oman.

### Sectoral and geographical composition of FDI
- Sectoral shifts:
  - Inward FDI has shifted away from the hydrocarbon sector toward financial services, transportation/communication, and manufacturing over the past two decades.
  - Outward FDI has increasingly targeted services (including transportation and communication) and manufacturing.
- Geographical shifts:
  - Historically, inward FDI dominated by Europe; recently increasing shares from Americas and other GCC countries, highlighting intra-regional integration.
  - Outward FDI destination shifted toward America, Asia-Pacific, and other GCC countries, though Europe remains dominant.

### Implications for growth and diversification (empirical evidence)
- FDI and growth:
  - FDI can boost growth by unlocking financing for investments, supporting innovation via knowledge spillovers and technology transfer, and creating high-skilled jobs.
  - Empirical evidence for the GCC:
    - Elheddad (2021) finds resource-related FDI stifles economic growth, while non-resource FDI shows minimal impact—highlighting the importance of sectoral allocation.
    - Korniyenko and Xin (forthcoming) find a positive relationship between inward non-hydrocarbon non-financial FDI and GCC growth: a "1 percentage point increase in inward investment/GDP associated with a 1-1.2 percent increase in real GDP after 5 years".
    - Inward FDI is also positively associated with economic complexity.
  - Outward FDI shows a positive, albeit not significant, relationship with growth, indicating potential benefits via technology transfer.

### Policy implications and recommendations
- Targeting FDI in specific sectors:
  - Policies should aim to direct FDI into high-technology sectors with relatively large spillovers into the domestic economy.
  - Improvements in the business environment and human capital development can enhance attractiveness for FDI.
- Developing capital markets to boost portfolio flows:
  - Recommendations include:
    - Loosening limitations on foreign ownership of stocks and bonds in GCC markets.
    - Establishing a pan-GCC stock exchange to increase liquidity and attract investors.
    - Encouraging companies to list on stock exchanges in other GCC countries.
    - Harmonizing listing requirements, disclosure standards, and trading rules across GCC markets.
    - Investing in modern trading platforms, clearing and settlement systems, and robust data dissemination.
    - Encouraging development of a strong investment research industry across the GCC.
- Cross-border banking and financial integration:
  - Streamline regulations across member states for banking, insurance, and investment products to create a level playing field.
  - Loosen restrictions on bank licensing and allow easier establishment of branches across GCC countries to foster competition and regional financial networks.
  - Promote financial innovation (Fintech and Virtual Assets) to enhance efficiency and accessibility:
    - Fintech can expand access (mobile wallets, online payments), streamline cross-border transactions, promote interoperability, and create new financial digital products attracting investment.
- Unified regional green finance approach:
  - A unified approach would enhance the pool of capital for sustainable projects, attract green investors, accelerate green technology and infrastructure development, and harmonize green finance standards and regulations to streamline project approval and implementation.

*Source: Annex III. Figures and text from "GCC: Pursuing Visions Amid Geopolitical Turbulence: Economic Prospects and Policy Challenges for the GCC Countries" (Annex III content as provided).*

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_Source: https://www.imf.org/-/media/files/publications/pp/2024/english/ppea2024066.pdf_